For most people in the United States, the trade war narrative has likely transformed into a mind-numbing soundbite that simply won’t go away — the type of news coverage that earns an immediate click of the TV remote control. 

And while traders and investors are also likely starting to tire of the ongoing trade war between the United States and China, participants in international financial markets don’t really have a choice when it comes to following the stories that have the biggest impact on market direction.  

As of the middle of September 2019, no grand bargain has yet been struck by the United States and China to resolve their ongoing trade dispute. However, a big development occurred recently that may ultimately be reflected upon as the moment in which the trade war actually started moving toward a tangible resolution.

The root of recent developments can be tied back to something known as African swine fever, which is a viral disease known to produce dangerously high fevers in domestic pigs. 

Although swine fever isn’t known to affect humans, it can spread like wildfire through domestic pig herds, known as “drifts” or “sounders.” Swine fever produces a high percentage of deaths in affected populations, but the impact can be even more wide ranging because farmers are often forced to cull “healthy” pigs that live in close proximity to an outbreak. 

In September of 2018, China reported its first ever case of African swine fever, and in the wake of that discovery the virus has cut an incredible path of destruction throughout the country (and neighboring region). 

In the last 12 months, swine fever has spread to every province in China and has led to the death or culling of an estimated 40 million pigs. That is believed to represent approximately half of the total domestic pig population in the Middle Kingdom. 

Adding important context to this tragedy is the fact that China on average consumes approximately half of the world’s total demand for pork. That dynamic means that the drop in supply has had a significant impact on pork prices, which are up over 30% in China in 2019.

The pork supply-demand dynamic also sits at the crossroads where implications of the U.S.-China trade war really hit home. 

As many are already aware, the Chinese had severely limited, or boycotted outright, a large amount of American farm production in order to apply pressure on U.S. President Donald Trump’s political base. 

As a result of those efforts, crop prices in the United States have been extremely depressed this year, with soybeans even touching a 10-year low. And it can’t be a coincidence that American farm bankruptcies have also been on the rise since the start of the trade war, with data indicating that annual American farm bankruptcies were the highest in 2018 since the Great Recession.

While China may have been successful in its attempt to put pressure on Trump through this tactic, it also has backfired to some degree — especially with the domestic pork crisis deepening at home in recent months. Without U.S. supplies of pork, the Chinese market is experiencing a severe shortage, and China was recently forced to tap its Strategic Pork Reserve to avoid further stress in the market. 

The fact that China possesses a Strategic Pork Reserve (composed of frozen pork) is almost worthy of a headline in its own right. But it’s additional measures taken by China to try to alleviate the pork crisis that might ultimately foreshadow a change in the tenor of U.S.-China trade war negotiations.

On Sept. 13, the Chinese announced they would be exempting American pork, soybeans and other farm products from recently announced tariff increases. Moreover, on the heels of that report, it became known that China had executed its first big purchase of American soybeans in months. Soybeans are incidentally one of the main ingredients used to produce feed for domestic pigs.

The timing of China’s announcements about pork and soybeans was even more intriguing due to the fact that President Trump had recently tweeted that he was planning to delay some new tariffs on China. In sum, these measures represented the first time in a while that both sides took active steps toward scaling back trade war tensions, instead of ratcheting them up. 

Looking at the immediate repercussions, the most important effects will be felt on the farms of America and in the homes, markets and restaurants of China. Prices for American crops such as soybeans will undoubtedly rally in the coming days, and possibly weeks, especially if additional Chinese purchases are announced. Likewise, pork availability in China should benefit immediately and catalyze an easing of prices.  

But in the longer run, the positive implications of this temporary thawing in trade war tensions could be far more significant. 

It’s entirely possible that leaders from the United States and China could use these gestures as an inspiration for finding common ground on a range of other hot points that are currently serving as obstacles toward a broad-based agreement. 

If that is the case, hindsight may ultimately reflect that the pork crisis in China served as a critical catalyst in moving this ongoing dispute toward tangible resolution.

Traders seeking to follow ongoing trade war developments would be well-advised to monitor soybean prices and other agricultural commodities in the coming weeks, as these markets are especially leveraged to the trade war. Another barometer that traders can follow is strength in the Australian dollar, due to the country’s strong ties to China from an export perspective. More information on trading soybean futures can be found here.

Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.